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The Australian dollar dipped on bad fundamentals – something quite uncommon. Does this imply a long term change? An update on the Australian economy as well as AUD/USD technicals.

At the beginning of the week, things looked good for the Aussie. Glenn Stevens, the governor of the RBA, said that house prices are too high – and this was  interpreted as a signal that the rates will rise again next week. Australia already has a high interest rate of 4%. But then things changed:

Retail sales, a very sensitive and up to date indicator of consumer spending,  dropped  by 1.4%. This was a big disappointment, as expectations were for a rise of 0.3%. Note that also last month’s figure was revised downwards to 1.1%.

And also in the housing sector, were prices are “too high” according to Stevens, the situation isn’t so good: Building Approvals fell for a second month in a row – by 3.3% this time. Expectations stood on a rise of 2.1%.

AUD/USD retreats

As these two figures were released, AUD/USD fell from 0.9206 to 0.9145 and settled under 0.9170. Earlier in the week, the Aussie managed to climb above 0.9170 and aim towards 0.9252, which was a peak earlier in the month.

So now, the Aussie is back down to the 0.9090 – 0.9170 range. If the pair loses 0.9090, the next support level is 0.8980, which was tested last week. A break upwards will send the pair to test 0.9250 once again.

Also against the Euro, the Aussie retreated from the 13 year lows. After EUR/AUD reached 1.46, it’s now around 1.47 once again.

How is Australia doing?

Australia is unique among the G10 members: it is the only country that didn’t experience a recession – it’s economy shrank for only one quarter. It’s also unique with the interest rate – it’s the only country to raise the rates – 4 times since the crisis began.

Australia enjoys prosperous trade with China and a well run country. In the vast majority of my Aussie outlooks, I’ve been bullish on the pair due to all these factors.

But now, as the world slowly exits the crisis, Australia may be losing its charm. As we’ve seen in these fresh figures and also in the recent employment data, Australia is OK, but doesn’t outshine its Western peers anymore.

A lot depends now on the upcoming rate decision next Tuesday – if the Reserve Bank of Australia makes a fifth rate hike from 4% to 4.25%, the Aussie bulls will get more energy and AUD/USD can rise. Another pause, as seen between the third and fourth hikes, can inflict more damage on the pair.

The key line to watch on the upside is 0.9327. A break above this line will mean a long term rise. The key level on the downside is 0.8567, which is currently far away. I remain optimistic…

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